Foreign investors could turn their attention back to India as capital rotates across emerging markets, according to Herald van der Linde, head of Asia equity strategy at HSBC. As reported by Essential Business Intelligence, van der Linde believes the artificial intelligence-led rally, which has largely benefited markets such as Hong Kong and Taiwan, is yet to fully play out in India. While AI is one of the dominating trends in global markets, the optimism around the technology will eventually trickle down to Indian markets, even though its rollout in the country is likely to be slower. However, the country's premium valuations and an uncertain earnings recovery are likely to remain key considerations for investors. Bay Capital Investment Advisors has reinforced this view in a white paper, arguing that India's exclusion from the global AI investment boom positions it as a potential beneficiary when the AI cycle corrects.
The scale of capital rotation away from India has been significant, with foreign portfolio investors pulling out approximately $23 billion from Indian equities in 2024 and a further $13 billion through November 2025, according to Bay Capital's white paper. Over the same period, Taiwan attracted $34 billion in FPI inflows on the back of its semiconductor and AI supply chain exposure, South Korea drew $22 billion, and China $18 billion. India was the only major emerging market to record net outflows, with the white paper attributing this directly to its negligible 0.2 per cent weight in the MSCI AI Index and zero representation in the Nasdaq AI Leaders Index. Despite this FPI exodus, domestic liquidity in India held firm with monthly SIP inflows reaching ₹21,000 crore and mutual fund assets under management rising 27 per cent year-on-year to ₹65 lakh crore.
Bay Capital's white paper flags several warning signs around the AI trade itself, noting that hyperscaler capital expenditure is projected to hit $200-220 billion in 2025, roughly 2.5 times 2021 levels. An MIT report from August 2025 found that despite $30-40 billion in enterprise investment in generative AI, 95 per cent of organisations are reporting zero return. The paper also draws parallels to the telecom-fibre build-out of the early 2000s, noting that much of current AI infrastructure spending is debt-funded. This contrasts with van der Linde's observation that Hong Kong and Taiwan have witnessed overspending in AI, but investor enthusiasm for the sector is beginning to moderate as price momentum in AI and chips slows down.
Despite the current challenges, Bay Capital argues that India's strong GDP growth outlook of 6.7 per cent annually through FY28, multi-year low inflation and recent structural reforms make it well-placed once global capital returns to fundamentals. The firm identifies FY27 as a likely inflection point for Indian market outperformance, as foreign portfolio investors who sold Indian equities to chase AI-driven opportunities in Taiwan, South Korea and China will reverse course once sentiment around AI normalises. The white paper describes the current phenomenon of sustained foreign selling being absorbed by domestic liquidity as structurally unprecedented among emerging markets, highlighting India's resilience in maintaining domestic investor confidence.
